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What is Rent Control?

Webster’s dictionary defines rent control as, “a system in which the government determines how much rent can be charged for an apartment, house, etc.” However, beyond just a simple definition, rent control comes in many legislative forms and has a fairly robust history in the United States. According to an article by the Cornell Quarterly, prior to World War II, rent control was not a government organized endeavor. Landlords, tenants, and public activists banded together to fight against profiteering amongst rental property owners. With the dawn of WWII, legislation favoring rent regulation became a point of serious discussion among federal legislators. Two factors contribute to wartime rent regulation: the anticipation of millions of returning war veterans, and the decrease in home and apartment construction during war time. In January of 1942 the Emergency Price Control Act became law and established the Office of Price Administration to create maximum rent thresholds across the nation. Post WWII, the vast majority of US cities had some form of rent control and, as the market stabilized, the power to impose rent control was transferred from federal to state governments. More cities began the deregulation process; however, many of the large urban cities such as New York and San Francisco chose not to abolish rent control due to large tenant populations. Currently 4 of the 50 states: California, Maryland, New Jersey, New York, and the District of Columbia have some form of rent control implemented via a city or countywide basis. New York is famously known for its extensive rent regulation, particularly in New York City; however, California is second in the number of cities currently enforcing rent control policies. Santa Rosa is now the newest member of California cities with rent control policies as of May 17th this year; the question at hand is whether or not this will solve the rent problem in the city or simply exacerbate the issue.

The Arguments

To be clear, there are good arguments both for and against rent regulation which is why both sides must be analyzed. It is important for low income earners to have the opportunity to find affordable housing and receive protections against eviction because of an unexpected increase in rent. Of equal importance is the right of the property owner to evict bad tenants and set rent at a rate which makes their investment profitable; not only for their personal benefit, but also for the benefit of the tenants.

The logical order of argument necessitates the critique of the solution be addressed first; therefore, we begin by examining the points raised against rent control. In 1992, the American Economic Review famously published a study revealing 93% of a sample of 464 American economists agree “rent ceilings reduce both the quality and quantity of available housing”. Their conclusion is drawn from the law of supply and demand and the naturally beneficial effects it has on an economy. To apply this principle to rent: when the demand for rooms is high and the supply is low, prices rise so as to reduce demand and restore equilibrium. Naturally, increased demand causes more construction of rental properties and homes as people see this as a wise investment. As more construction occurs, supply increases and causes rents to decrease. If rent control is inserted into this situation it artificially keeps rents at a lower than market rate and thus reduces the motivation to build new properties. Therefore, supply stays low and demand stays high resulting in extremely high rents on non-controlled properties and artificially low rates for controlled properties. Ultimately when the property owner is unable to receive a sufficient return on investment they either reduce the quality and frequency of property improvements or search for other investment opportunities. In his book, Rent Control Debate, Paul Niebanck conducted a study in New York and California where he concluded 29% of rent controlled residential properties were in a state of disrepair whereas only 8% of non regulated residential properties were in a similar state. This is because rent control restricts the amount of income one makes from a property and therefore they have less to invest back into the property. As a result, older rent controlled properties continue to be in disrepair, rent control hamstrings the ability of an owner to remodel and improve older properties. Not only does rent control seemingly limit owner improvement resources and motivations; it also impedes the ability to create a pleasant living environment. Many regulation ordinances define tenant and owner rights including the right of an owner to evict a tenant from their property. This is known as “just cause eviction” protection and it requires an owner to provide the reasons a tenant is no longer allowed to dwell at a property. While this protection is meant to end evictions by owners looking to raise rent in vacated space, it often has the effect of prohibiting eviction of a tenant who is negatively affecting the quality of life for neighboring renters. William Severi, co-owner of North Bay Property Advisors, recently had an example of this at a property in Santa Rosa where a tenant was verbally threatening neighboring tenants. This tenant was in essence a bully and his neighbors were afraid to confront him about his behavior. After receiving multiple complaints from tenants requesting to remain anonymous, Mr. Severi was able to evict the tenant. The evicted tenant demanded to know why he was being forced out of the property but Mr. Severi chose not to engage with the man so as to protect the tenants who wished to remain anonymous. Just cause was not required in this situation because no such law existed at the time; however, if Mr. Severi would have been required to give a reason, the chances of the tenant being evicted would have been slim. The requirements of just cause are often not comprehensive and are difficult to prove. Many property owners feel the rent regulation placed on their properties transfers too much power into the hands of their tenants and leaves them with little or no ability to create a quality renting environment.

Even those in defense of rent control agree the early forms of regulation known as “rent ceilings” have an adverse affect on the economy. Rent ceilings are simply a cap set on rent rates in a specified area; this form of regulation takes no consideration for age or type of property. The argument most commonly used by defenders of rent control is summarized as follows: rent regulation has evolved to provide an equitable solution to rent crises, it is no longer the archaic system employed in its infancy. Rent ceilings have been replaced with a, “set of regulations governing not only allowable rent increases, but also conversion, maintenance, and landlord-tenant relations.” An article entitled Paul Krugman, You’re Wrong About Rent Control, states current regulatory ordinances have little to no affect on the maintenance of properties or the construction of new properties. This is because the state of California has prohibited the application of rent control on properties which received a certificate of occupancy after February 1, 1995. Surrounding states have adopted similar legislation. Also, modern rent control most often permits the owner to pass a percentage of the cost of capital improvements to the tenant as maintenance and operating costs. These modifications are believed to be an effective solution to the economic conundrum of rent control. The end goal of rent regulation is to provide an economically diverse living environment within cities. These ordinances attempt to defend the ability of tenants to ascertain a quality living environment and protect themselves from landlords seeking to evict in order to garner more money from a new tenant.

Santa Rosa’s Situation

A recent push by the Santa Rosa community has caused the Santa Rosa City Council to pass a moratorium on rent increases. The 45 day freeze on rent hikes was passed and adopted on May 17th of 2016 and took effect on June 18th of the same year. The temporary ordinance prohibits rent increases of more than 3% within a 12 month period. The set expiration date of the moratorium was set for August 6th; however, the city council garnered the 5-2 vote needed to extend the ordinance for 90 days while they develop permanent and comprehensive rent stabilization and just cause eviction ordinance. Currently the moratorium affects apartments larger than non-owner occupied triplexes if they were given a certificate of occupancy before February 1, 1995. The new ordinance currently in development is due by August 16th and, pending approval, would go into effect at the end of September the same year. The Alameda County Rent Stabilization Ordinance is supposedly having a significant influence on the type being developed in Santa Rosa. Alameda restricts rent increases to one every 12 months and the increase must be approved by the Rent Review Advisory Committee unless the requested increase is equal to or less than 5%. The tenant may dispute any rent increase and the dispute is reviewed by the Rent Review Advisory Committee. All evictions are permitted; however, evictions without cause require relocation fees, are only allowed a few times a year, and the replacement tenant’s rent cannot be greater than 5% the previous tenants rent. Capital improvement costs are permitted to be passed on as rent to tenants as long as the improvement is 8 times greater than the current tenants rent; no rent increase is permitted for regular repairs, replacement or maintenance. While the facts surrounding Santa Rosa’s rent ordinance are uncertain, the Alameda ordinance give an estimate as to what the future holds.

Solution or Problem?

A recent study by Beacon Economics showed rent control to be an ineffective measure in addressing the problem of housing within a city. This study used U.S. Census data and the 2013 American Community Survey to conclude that rent restrictions actually negatively impact the people who need lower income housing the most. What most often happens in rent controlled housing is a person enters the cheap unit when their income is low and as they begin increasing their income and no longer need the reduced rate, they still choose to dwell in the regulated unit because they enjoy the benefit of cheap rent. Thus, those who genuinely need reduced rate housing can no longer find it because of the absence of turnover within units. Just cause eviction also exacerbates this issue as property owners are not permitted to evict “no-cause” tenants without penalties. Does this mean rent regulation should be abolished completely? Not necessarily, the lack of affordable housing in Santa Rosa is a problem for many low income families trying to make ends meet. However, one thing this study does definitively show is that the proposed solution of rent regulation as it is seen today is not as effective as it needs to be to actually solve the problem. One possible solution is to address the root cause as opposed to artificially adjusting the consequences. In other words, the issue of focus should be the lack of supply, not the cost of rent. Currently, the cost of building a new residential building is so high, the supposedly high rent is not enough to incentivize builders unless the project is to be considered luxury housing. The list of construction and impact fees is extensive and results in tens of thousands of dollars being spent just to receive permission from the city to build. In an article by the Press Democrat written in August of 2015, Kevin McCallum concluded that the cost of approval for building an apartment complex in Santa Rosa is between $27,000 and $42,000 per unit. If the city of Santa Rosa truly wants to see a decrease in average rent, they will provide incentives for the construction of low and middle income housing instead of penalizing builders. This is obviously not the only possible solution; however, it is potentially a very viable one. There are many ways to address the problem at hand, what do you think? Should legislation include yearly income qualifications for rent regulated housing? Should there be a different solution entirely? Let us know by posting your comments and questions.